The Right Time To Pick A Bargain

Competition between prime and suburban commercial locations is making it easier for corporates to negotiate a good deal, reports Srikumar Bondyopadhyay and Rajkumar Leishemba

Corporates have some reason to cheer. Indian metros have become cheaper in terms of office rentals this year as compared to last year and the “Indian office market is continuing to slip further against global market rents,” says the recently published Global Market Rents report by property consultant CB Richard Ellis. The report is a semi-annual survey of occupancy costs for comparable classes of office space in 155 metropolitan areas around the world.

Mumbai, which was eighth in terms of occupancy costs, slipped to 11th position in January, while New Delhi slipped from 28th place to 32nd. Mumbai’s occupancy costs dipped 29 per cent to US$ 56.90 per square foot per annum against US$ 79.8 a year ago. New Delhi had an occupancy cost of US$ 40.84 per square foot per annum in January 2002 as compared to US$ 44.38 a year ago.

These falls are attributed to increased corporate relocation to suburban areas from downtown central business districts (CBDs) in these Indian metropolises. Both Mumbai and Delhi had witnessed increased relocation of corporate tenants to suburban areas, where newer buildings with better amenities and higher infrastructure quality are relatively more cost effective, too.

“Offering high quality construction and state-of-the-art infrastructure for the office market in New Delhi and Mumbai, coupled with lower rentals in the suburban commercial market, has brought down rentals,” says the report.

However, this is an outcome of a larger trend. “For the first time in Indian real estate market history, property prices have been on a long downswing course since 1996-97. This would indicate that the Indian property market is set to follow the cyclical movement that can be found in the global property market,” says Sanjay Verma, executive director, Cushman and Wakefield (India) Pvt Ltd, a property consultancy firm.

Verma adds, “Since the Indian economy was opened up for globalisation, the real estate market is also gradually aligning itself with the global property market. Hence, you see the commonplace cyclical movement in the global property market is also about to set in India.” Since 1996-97, the capital and rental values of commercial properties across the Indian metros have come down by 25-40 per cent as of now. “Earlier, only the CBDs were the hub of all business activity as only these places offered buildings for office and commercial use,” explains Manish Kashyap, director, corporate services, CB Richard Ellis (India). “With only a few builder-developer, the commercial property market in CBDs was in a situation of many buyers and too few sellers. So, the builder-developers were able to command abnormal rents and excessive advance deposits and set one-sided terms while leasing out space to corporates. But with the coming up of suburbs offering better quality space with better amenities at cheaper rates, corporates now have a choice.”

This has brought down the office rentals at metro CBDs, in addition, the newly-constructed suburban buildings have also set a new high in quality standards, a high that continues to move up. The clauses of lease agreements have also undergone significant changes, agree both Verma and Kashyap. According to them, lease agreements are now more flexible and favour the corporate lessee both monetarily and tenurewise.

An interesting consequence of this oversupply situation is that landlords have become more realistic in their demand. They are renegotiating rentals by up to 40 per cent less than what they were getting three years ago. Commercial demand in Gurgaon, a suburb of Delhi, is particularly high for high-tech Grade A buildings with an international look and facilities such as 100 per cent power back-up, security systems and fire-fighting facilities. Older buildings are definitely not on a corporate’s priority list and the landlords of such buildings have already begun realising that the only way to keep them saleable is to refurbish them and add new amenities to make them attractive in the market.

A number of commercial buildings constructed by various builders in the National Capital Region (NCR), particular in Gurgaon, have come up recently. Among these are Unitech’s Signature Towers and DLF’s Gateway Towers. A million more square feet are expected to come up by the middle of this year. And once these Grade A properties come up by June-July, commercial rentals are expected to come down further. During these first three months of this year, Gurgaon has witnessed Citibank leasing 55,000 square feet at DLF Square, CGU leasing 30,000 square feet, Agilent Technologies leasing 50,000 square feet in Udyog Vihar and Oracle leasing 25,000 square feet at Corporate Park.

A large number of corporates have also begun to relocate to secondary markets within Delhi to reduce costs and acquire larger, independent offices with better amenities. Many older commercial spaces in these secondary markets such as Mathura Road, South Delhi and Vasant Vihar are being refurbished.

The fall in rentals is having a direct effect on property transactions. In fact, after a lull of a few years, both CBD and non-CBD areas in Delhi are witnessing increased activity this year. In February and March 2002, four out of five key commercial property transactions in Delhi took place in CBDs. Even a few months before that, suburban Gurgaon and Noida accounted for most of the transactions. According to a Cushman and Wakefield (India) report, Balmer Lawrie and Co has recently leased 4,000 square feet, fully-furnished, in Ambadeep Building in Connaught Place at a rate of Rs 65 per square foot. China Airways leased an equivalent amount of space in Connaught Place’s Kanchenjunga Building at a rate of Rs 70 per square foot. The CBD of Connaught Place alone has witnessed lease transactions totalling over 30,000 square feet since the beginning of 2002. “This is despite the fact that following the ongoing economic downturn, many corporates, particularly in the hospitality and airlines businesses, preferred to postpone any real estate initiatives,” says CB Richard Ellis (India) First Quarter 2002 report on the Indian market. The report, however, notes that the secondary micro-markets of Delhi witnessed some activity from companies in the retailing business. Ruby Tuesday leased 5,400 square feet and Subway leased in 1,200 square feet at the Saket PVR Complex.

Another fallout of the depressed property market is a tendency on the part of corporates to buy commercial property outright. On Mathura Road, Tata Teleservices purchased Concord Motor’s 8,000 square foot property for Rs 4 crore, on Aurangzeb Road Hoogly Holding bought out Eveready Industries’ 5,100 square foot property for Rs 20 crore. Delhi’s CBDs have seen values for prime, A grade space fluctuate between Rs 5,000 and Rs 10,000 per square foot. In secondary CBD areas such as Nehru Place and Bhikaji Cama Place, values start at Rs 3,000 per square foot. In contrast, capital values for commercial space in Gurgaon range between Rs 3,750 and Rs 6,500 per square foot.

Despite the overall recessionary trend, the Mumbai commercial property market saw some diamond companies buying up sizable space. In two rather expensive property deals, two office premises in Mumbai’s Opera House, better known as the Diamond District, sold for a mind-boggling Rs 42,000 per square foot. Last month, diamond trading company Blue Star picked up office space in Prasad Chambers measuring 1,345 square feet for Rs 5.65 crore. In another deal, Bessar Diamonds purchased 250 square feet, also in Prasad Chambers, for Rs 1.05 crore. According to property experts, these are probably the most expensive deals conducted in the country in the last 36 months.

In central Mumbai, Telstra Trade-place Pvt Ltd purchased 3, 275 square feet of office space in Sakhar Bhavan, Nariman Point, from Scientific Instrument Co Ltd at a rate of Rs 11,145 per square foot. Griffin Marine Travel Pvt Ltd purchased 1,715 square feet from Wilco Ship Management and Travels Pvt Ltd at Maker Chamber III, Nariman Point, at a rate of 10,500 per square foot.

The suburban commercial district of Andheri-Kurla has emerged as a favoured corporate destination in recent months. Leasing as well as sales activities have fared better here than in the other micromarkets of Mumbai. However, leasing activity here started dipping in the third quarter of 2001. With many projects in the Andheri-Kurla belt expected to be completed by the end of this year, supply is likely to surpass demand, bringing down rental values. In February-March 2002, Andheri (E) saw a key investment transaction by HDFC Bank, which purchased office premises measuring 27,474 square feet at a rate of Rs 1,800 per square foot.

In other parts of suburban Mumbai, Powai saw Spectramind leasing 60,000 square feet, Ocwin Finance leasing 50,000 square feet and Fulford leasing 40,000 square feet in Malad. In Lower Parel, the WPP group leased 57,000 square feet in Peninsula Chambers; Tata AIG leased 7,290 square feet in Godrej Millennium, Koregaon Park, Pune; HSBC leased 60,000 square feet in Pune; and Birla Sun Life leased 3,760 square feet in Ahmedabad. The slide in property prices has resulted in central Mumbai attracting a number of insurance companies. Early this year, ICICI Prudential Life Insurance Company, ING Vysya Life Insurance Company and Dabur CGU Life Insurance located themselves here.